Bad home loans top $72B in ‘colossal failure’

WASHINGTON - Costs from faulty mortgages and shoddy foreclosures have topped $72 billion at the biggest U.S. banks as they near a settlement of a 50-state probe into the industry’s practices.

Wells Fargo & Co., Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Ally Financial Inc., the five largest home lenders during the real estate boom, tallied at least $6.78 billion in new costs tied to mortgages during the second half of 2011, according to data compiled by Bloomberg. Bank of America, ranked second among U.S. banks by assets, contributes $41.8 billion of the overall total.

The mounting costs are pushing lenders and regulators to resolve investigations and lawsuits over faulty home lending, including a 50-state review of foreclosures. The wrangling over the status of old loans has made some banks more reluctant to make new ones, even as Federal Reserve Chairman Ben S. Bernanke appeals for action to increase lending and fix the U.S. housing market because it’s a drag on the economic recovery.

“It’s a colossal failure of basic banking,” said David Knutson, a credit analyst in Chicago with Legal & General Investment Management, a holder of bonds in some of the lenders involved. “It’s surprised everyone in terms of persistence and longevity and I think it will continue to surprise.”

‘Fear of the Unknown’

The banks are negotiating a settlement said to be worth as much as $25 billion with state attorneys general, and it may expand later to include some smaller lenders that made mortgage loans. While an accord could be announced as early as this week, some states have been holding out for tougher and possibly more expensive terms, including the right to press future legal claims.

“The fear of the unknown is a lot worse than when you finally get a figure,” said Alex Lieblong of Key Colony Management LLC, which manages about $153 million, including shares in Bank of America and Wells Fargo. “If you could get it all into a box and say that this is the known figure, then that will be viewed as a positive.”

Spokesmen for all five of the lenders declined to comment.

The bulk of the expense was triggered by investors who bought mortgages and then demanded refunds after finding flaws in the underwriting, including false data about borrower incomes and home values. Such sales to investors typically came with promises, known as representations and warranties, to buy back defective loans.

Outstanding claims against Bank of America jumped 22 percent in three months to $14.3 billion as of Dec. 31.

Countrywide Acquisition

Bloomberg’s tally also includes expenses tied to court cases and investigations. Bank of America’s increase of at least $2.65 billion in mortgage costs during the second-half of 2011 included $1.76 billion tied to litigation, filings show.

That increased total costs since the start of 2007 for the Charlotte, N.C.-based bank to $41.8 billion. CEO Brian T. Moynihan has been hobbled by bad loans created at Countrywide Financial Corp., acquired in 2008 as the subprime home lender careened toward possible bankruptcy.

The combined company, which once accounted for one in every four U.S. mortgages, now controls only 5.6 percent of the market, according to FBR Capital Markets Corp., as Moynihan tries to stanch losses at the home lending unit.

Get the most up-to-date data on the Rhode Island and southern Massachusetts business community from the PBN List Center. Download and purchase PBN Lists as well as the complete Book of Lists in Excel format.